Business confidence continues to fall due to uncertainties ahead

03 Nov 2014

Business confidence has fallen again as economic uncertainty impacts on firms’ plans for the year ahead, even though it is still at a historically high level. With the General Election less than six months away, the latest ICAEW/Grant ThorntonUK Business Confidence Monitor (BCM) also indicates that skills shortages and regulatory requirements are more of a challenge now than in the run up to the last election in 2010.

Key findings for Q4 2014:

The BCM Confidence Index stands at +28.6 down from +32.3 last quarter – though a decline for two consecutive quarters, confidence is still relatively high

Capital investment has picked up but is expected to fall in 2015, with turnover and profit growth stabilising

Skill shortages and levels of staff turnover are a greater issue for businesses this quarter, highlighting a potential barrier to growth ahead

Export increases have slowed markedly alongside a struggling Eurozone economy, although domestic sales have remained stronger

Michael Izza, ICAEW Chief Executive, said:

“A rebalancing of the economy was promised by the Coalition Government after the last election. The latest BCM figures show that this has not happened. Exports have been weakening, while domestic sales are much more buoyant. Capital investment expectations have also flattened and manufacturing is not as strong as it should be. With less than six months until the General Election, questions will be asked about the long term sustainability of the economic recovery and whether any real changes have been made.”

Scott Barnes, CEO of Grant Thornton UK LLP, added:

"The latest BCM results continue to reflect the ‘Indian summer’ feel to 2014 but there are signs that cooler conditions are approaching. Although confidence remains relatively high, financial indicators are beginning to reflect the uncertainties that businesses are feeling about their prospects for the year ahead. Indeed the outcome of the upcoming general election is creating uncertainty amongst business leaders not only around what shape our domestic future might take, but potentially also our place within the EU.

"In addition, and despite efforts, exports appear to be contracting. As conditions in the Eurozone, notably in France and Germany, begin to worsen, UK business must focus on other, non-traditional, export markets in a bid to drive continued growth."

Challenges ahead of the General Election

With less than six months to the General Election, labour market factors are a greater challenge to businesses now, compared to the run up to the last General Election. More businesses are reporting that staff turnover (10% in Q4 2009 vs 22% in Q4 2014) and the lack of availability of non-management skills (3% in Q4 2009 vs 20% in Q4 2014) are posing problems. Regulatory requirements are also a bigger factor for companies now than in the run up to the last time the UK went to the polls.

Salary growth remains weak but improves in real terms

Salaries have started to creep up in real terms, although this is largely down to falling inflation, as annual pay rises remained steady this quarter. Average total salary increased by 2.2% in the last twelve months and is expected to increase by 2.3% in the next year. With inflation falling to 1.5%, households may feel a slight improvement in disposable income.

Skills shortages for Construction sector

Despite spare capacity, skills shortages are presenting a growing challenge for all sectors, with the Construction sector (33%) particularly struggling with getting non-management skills. A third of businesses in this sector see the availability of these skills as more of a challenge now than a year ago. Companies in this sector, together with those in Business Services, also report the highest increase in staff numbers over the past year.